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CenterPoint Energy, Inc. (NYSE:CNP)

Q3 2009 Earnings Call

October 28, 2009 10:30 am ET

Executives

Marianne Paulsen - Director of Investor Relations

David M. McClanahan – President, CEO

Gary L. Whitlock - Executive Vice President, CFO

Analysts

Lasan Johong - RBC Capital Markets

Faisel Khan - Citigroup

Scott Engstrom - Bynum Capital Management

Steven Gambuzza - Longbow Capital

Mark Rogers - Gagnon Security

Steven Wong - Carlson Capital

Presentation

Operator

Good morning and welcome to CenterPoint Energy’s third quarter 2009 earnings conference call with senior management. During the company’s prepared remarks all participants will be in a listen only mode. There will a question and answer session – management’s remark. (Operator’s instructions) I will now turn the call over to Ms. Marianne Paulsen, Director of Investor Relations. Ms. Paulsen?

Marianne Paulsen

Thank you very much, Tina. Good morning everyone. This is Marianne Paulsen, Director of Investor Relations for CenterPoint Energy. I’d like to welcome you to our third quarter 2009 earnings conference call. Thank you for joining us today. David McClanahan, President and CEO and Gary Whitlock, Executive Vice President and Chief Financial Officer will discuss our third quarter 2009 results and will also provide highlights and other key activities.

In addition to Mr. McClanahan and Mr. Whitlock, we have other members of management with us who may assist in answering questions following their prepared remarks.

Our earnings press release and Form 10-Q filed earlier today are posted on our website which is www.centerpointenergy.com under the investor’s section.

I would like to remind you that any projections or forward-looking statements made during this call is subject to the cautionary statements on forward-looking information in the company’s filings with the SEC.

Before Mr. McClanahan begins I would like to mention that a replay of this call will be available until 6 PM, Central Time through Wednesday, November 4, 2009. To access the replay, please call 1-800-642-1687 or 706-645-9291 and enter the conference ID number 32554354. You can also listen to an online replay of the call through the website that I just mentioned. We will archive the call on the CenterPoint Energy website for at least one year.

And with that I will now turn the call over to David McClanahan.

David M. McClanahan

Thank you, Marianne. Good morning ladies and gentlemen. Thank you for joining us today and thank you for your interest in CenterPoint Energy. This morning we reported net income of $114 million for the third quarter, or $0.31 per diluted share. This compares to net income of $136 million or $0.39 per diluted share for the same period of 2008.

Operating income for the third quarter of 2009 was $287 million compared to $337 million for the same period of 2008.

Our electric and gas distribution utilities and our interstate pipelines, which are our core regulated businesses achieved solid results this quarter, dispute the challenging economic climate. Lower natural gas and liquids prices negatively impacted our field services business. But we continue to position this unit for the future. With the addition of several new contracts in the Haynesville Shale Place. Due to reduced basis differentials operating income at our energy services business was also negatively impacted.

Let me give you a little bit more detail regarding the performance of each of our business segments this quarter. Beginning with Houston Electric, our regulated transmission and distribution utility; Houston Electric reported operating income of $187 million an $18 million increase from the $169 million reported for the third quarter of 2008.

Last year’s third quarter operating income, you may remember was negatively impacted by $12 million as a result of Hurricane Ike. After adjusting for this impact, Houston Electric achieved growth of over 3% in operating income.

This improvement was principally the result of increase electricity usage due to warmer than normal weather throughout most of the quarter. The addition of over 26,000 customers since the third quarter of last year and the benefits of a transmission rate increase implemented last November.

Our service territory continues to grow at a 1%- 1.5% annual rate, which is somewhat below our recent growth rate of 2%. We don’t expect to return to that level for at least 12 months or so.

As we’ve discussed in the past, Houston Electric is in the process of installing an advanced metering system. And we’re pleased to report that the implementation in (inaudible) system is going well. We’ve installed over 100,000 smart meters so far. And we’re on target to install approximately 145,000 smart meters by the end of this year.

Under our current plan we will deploy more than 2 million smart meters across our service territory over the next five years.

In early August, Houston Electric filed an application with the Department of Energy for $200 million in Federal Stimulus Funds available to the American Recovery and Reinvestment Act of 2009. In our application we requested $150 million to accelerate the implementation of our advance metering system, and $50 million to support our intelligent grid initiative.

Yesterday, the DOE notified us that we had been (inaudible) associations. Assuming that the project is funded in accordance with our application, we will accelerate our AMS deployment to substantially complete the project by 2012.

Because the DOE funds require matching expenditures, there will be some acceleration of company funding. But we don’t expect it to be material (inaudible) their cash flow or earnings.

In a few moments Gary will report on our storm cost recovery bonds we expect to issue later this year to recover our costs related to Hurricane Ike.

Our natural gas distribution business typically reports a loss in the third quarter due to (inaudible) nature. And this year was no different. The operating loss this quarter was $15 million compared to a $6 million loss last year. The decline was principally due to an $8 million increase in pension expense, as well as increases in other operating expenses primarily employee related and customer service related costs.

Expense increases were benefits from rate changes and miscellaneous revenues totally approximately $8 million. And lower bad debt expense of $4 million.

In July we filed two rate cases. In our Houston service territory, which covers 29 cities, serving nearly 1 million metered customers, we requested a revenue increase of a little over $25 million. In Mississippi, we requested a $6.2 million increase. In both cases we asked to recover increased operating costs, driven in large part by higher pension and employee related expenses. As well as cost related to increased investments in facilities since the last rate case.

In Houston we also requested a mechanism that would annually adjust rates to reflect changes in investment, expenses and usage similar to the mechanism recently approved for our Texas Coast Service territory.

We expect the Mississippi case to be decided late this year and Houston to be decided early next year.

In our Minnesota case which we filed with the Minnesota Public Utilities Commission last November, we asked to increase rates by approximately $60 million and to decouple revenues from the volume of gas sold.

In January we implemented a $51 million interim rate increase which is subject to refund. The commission should make its decision in December and issue a final (inaudible) early next year.

Our competitive natural gas sales and services business reported an operating loss of $8 million for the third quarter of 2009, compared to operating income of $35 million for 2008. We recorded mark-to-market charges of $8 million this quarter compared to gains of $46 million last year.

As you know, these mark-to-market impacts are associated with derivatives we used to lock in economic gains.

In addition, in the third quarter of last year we recorded a $24 million right down of inventory to the lower of average cost or market.

Excluding these items, our energy service business was down approximately $50 million from last year. This decline is principally the result of reduced wholesale opportunities because of significantly tighter locational price differentials.

Our retail business for the quarter was down about $3 million due principally to reduced gas usage by our customers. However, for the year our retail sales have been stable.

Our interstate pipelines recorded operating income of $64 million for the third quarter this year, compared to $55 million for 2008. The third quarter of last year included a $7 million right down associated with pipeline assets removed from service.

Adjusting for this right down, operating income increased approximately $2 million this quarter. Our core business continues to perform well building on its strong fee based foundation with increased margins from our Carthage to Perryville Pipeline, as well as increased revenues related to new firm contracts to serve power generation facilities on our system.

This core margin growth more than offset reduced ancillary and other transportation services as well as higher operating costs associated with new facilities and increased pension expense.

Our equity end comes from ongoing operations of the Southeast Supply Header or SESH, our joint venture with Spectra, was $6 million for the quarter. However, this gain was more than offset by an $11 million non-cash charge to reflect SESH’s decision to discontinue the use of regulatory accounting.

In the third quarter of last year equity income was $18 million, primarily from allowance for funds used during construction.

Now, let me turn to our field services segment. We reported operating income of $23 million for the third quarter of 2009, compared to $44 million last year. Operating income for the third quarter for last year included a gain of $7 million associated with the settlement of system and balances compared to a gain of $3 million this quarter. The remaining $17 million increase in operating income was primarily the result of significantly lower natural gas and natural gas liquids prices this year.

We also experience reduced gathering and processing in our traditional natural gas basins due to a significant decline in drilling activity. However, we more than offset this decline by increase gathering in the Shale Place. In addition to operating income, we also recorded equity income of $2 million from our jointly owned natural gas processing facilities, compared to $4 million the previous year. Again, the decline was primarily due to lower liquids prices.

Last month we signed long term agreements with subsidiaries of EnCana and Shale to provide gathering and treating services for their growing Haynesville Shale natural gas production. We acquired facilities that are gathering and treating production of over 100 million cubic feet per day. And are expanding these facilities to gather and treat up to 700 million cubic feet per day. This expansion is expected to be completed in about 18 months and cost up to $325 million.

The agreements have minimum volume commitments and provide us exclusive rights to gather and treat their natural gas production. As part of the agreements EnCana and Shale can commit to additional volumes and we will further expand the facilities to gather and treat up to an additional one billion cubic feet per day, which could cost up to an additional $300 million.

Despite an over 50% year-over-year decline in drilling activity in the traditional basins activity in the Shale areas, particularly the Haynesville Woodford and (inaudible) Shales has been minimally affected, although with less drilling activity than we anticipated. Producer activity has remained steady and this is where we are concentrating our activities. Because of acreage dedications, volume commitments and our guaranteed return contracts we believe we are well positioned as drilling activity escalates.

In closing I’d like to remind you of the $0.19 per share quarterly dividend declared by our board of directors on October 22nd. We believe our dividend action continues to demonstrate a strong commitment to our shareholders and the confidence the board of directors has in our ability to deliver sustainable earnings and cash flow.

With that, I will now turn the call over to Gary.

Gary L. Whitlock

Thank you David, and good morning to everyone. Today I’d like to discuss a few items with you beginning with an update on the process for recovering our cost related to Hurricane Ike. As we have previously discussed the Texas legislature earlier this year passed a bill that authorizes utilities to issue non-recourse system restoration securitization bonds to recover costs associated with hurricanes and other major storms occurring subsequent to January 1, 2008. These bonds are similar to the three series of transition bonds we’ve previously issued to recover our stranding call and have the dual benefit of allowing us to recover our hurricane related costs in a timely fashion and lowering the ultimate cost to consumers.

The PEC has now issued the necessary orders to allow us to recover approximately $663 million in storm restoration costs associated with Hurricane Ike. Of the $663 million, approximately $643 million is related to our distribution system and will be recovered the issuance of bonds plus carrying costs from September 1, 2009.

The balance of $20 million plus carrying costs relates to our transmission system and will be recovered in rates set in our next transmission of cost of service proceeding.

In our financing order the PEC allows us to issue bonds for the full amount of storm restoration costs incurred without reducing that amount by deferred tax benefits related to the storm restoration costs. Instead we will apply a credit to our customer’s bills to reflect the benefit of approximately $207 million of deferred taxes, effective on the same date as the system restoration charges.

In 2010 this will result in reduced operating income of nearly $24 million of Houston Electric. Decreasing over time as the differed tax is reversed. Depending on market conditions we expect to issue the bonds in the fourth quarter of this year. Based on this expectation and having the hurricane season effectively over for this year Houston Electric terminated its 364 day, $600 million secured credit facility on October 6th. This facility served an important purpose as the liquidity safety net for Houston Electric this past year.

Now let me discuss our recent financing activities. In August SESH secured a permanent financing through the issuance of $375 million of 4.85% senior notes due in 2014. A subsidiary of CERCs received a construction loan repayment of $186 million representing our half of the proceeds from the issuance of the notes.

Proceeds from the construction load repayment were used to repay borrowing under CERCs credit facility. On October 9th, CERC extended its receivables facility for one year. The facility size ranges from $150 million to $375 million consistent with seasonal changes in receivable balances and provides additional liquidity for CERC.

We have continued to improve our balance sheet this year. In September we raised approximately $280 million in an underwritten equity offering in conjunction with the announcement of our field services business signing excellent long term agreements with EnCana and Shale to expand gathering and treating facilities in the Haynesville Shale.

Combined with the sale of common stock through our previously announced continuous offering program and the issuance of common stock through our savings plan and enhanced dividend reinvestment plan, we have raised approximately $485 million through the sale of 43.6 million shares of common stock through September 30th.

The combination of internally generated cash and cash from our financing activities this year will allow us to reduce debt. And we expect to end the year with a significant cash balance and be undrawn in our various credit facilities.

We continue to have a relatively large capital budget witch includes our regulated operations franchise required capital and a number of very attractive projects, particularly in our pipeline and field services segment.

Producer activity continues to be barely active in the Shale place and we remain committed to pursue value creating opportunities that this activity presents.

We have consistently stated that our objective is to improve our balance sheet and enhance our credit metrics to insure that we have the financial flexibility to execute our business plan. And we are committed to financing our operations using an optimal mix of debt and equity inline with our overall business risk profile.

My final topic will be our 2009 earnings guidance. This morning in our earnings release we announced that we reaffirmed our 2009 earnings guidance range of $1.05 to $1.15 per diluted share. In providing our guidance we continued our performance to date as well as various economic, operational, financing and regulatory assumptions including the timing of the sale of storm restoration bonds associated with Hurricane Ike.

We have assumed normal weather in both the electric and gas utilities and we have excluded the effects of mark-to-market, our inventory accounting on the earnings of our competitive natural gas sales and services business.

We have also excluded any impact to income from our pending true-up appeal and from any change in the value of Time Warner stocks and the related ZENS securities. In addition, we have excluded the impact to income from the discontinued use of regulatory accounting (inaudible).

Finally, we have assumed a full year tax rate of 34% that takes into consideration our third quarter tax rate of 25% that reflected the recent settlement of tax audits for 2004 and 2005.

Now I’d like to turn the call back to Marianne.

Marianne Paulsen

Thank you, Gary. With that we will now open the call to questions. And in the interest of time I would ask you to please limit yourself to one question and a follow up. Tina, would you please give the instructions on how to ask a question.

Question and Answer Session

Operator

(Operator’s instructions) Our first question will come from the line of Lasan Johong with RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Thank you. Can I ask a question on this DOE grant money? I’m a little confused as to what the schedule looks like. It sounds like you completed the program by 2012. But earlier on David said that it would take five years to complete two million meters. So I’m kind of wondering what I’m missing here?

David M. McClanahan

Lasan, I probably confused you. That’s our original schedule. Our original schedule had us completing it by 2014. With the DOE funding and $150 million of the stimulus funds goes to advanced metering. We will accelerate that from 2014 to 2012. And then we’ve got $50 million that we are going to start putting in our intelligent grid, our mid grid intelligent. So, those two components add up to the $200 million.

Lasan Johong - RBC Capital Markets

I got you. The other question I had was on the acquisition, a 100 million cubic feet per day of gathering, potentially going to 700 million cubic feet. What would trigger those growth patterns and how do we monitor that and CapEx spending associated with that? And is the acquisition in general what you had expected?

David M. McClanahan

The Shale and EnCana, these are two separate contracts; they have a very aggressive drilling program in the Haynesville area. So we expect based on their production drilling schedule and estimated production schedule that we’re going to ramp up to that 700 million after we get all these facilities completed. However, the company has volume commitments. So if they don’t hit their drilling schedule or their production schedule we have protections to get paid anyway. So we’re hoping they do well. There are some upsides if they in fact produce and we don’t have to rely on volume commitments. And of course we’d like to see them be very successful where they could go ahead and elect to expand these facilities and we would even put in more.

Lasan Johong - RBC Capital Markets

And do you think – is this acquisition as you would expect it, better than expected? How would you characterize it so far?

David M. McClanahan

We’re delighted with this acquisition. These contacts, we’ve been working on them for a number of months. They’re in our sweet spot. We gather gas in northern Louisiana, have for a long time. We wanted to be in the Haynesville Shale play. We had some minor activities in that area. So we’re really excited about this. I think it’s exactly what we wanted to do. And we’re just hoping it’s the start of something even bigger.

Lasan Johong - RBC Capital Markets

Gary, in the CapEx spending you need up to get up 700 million cubic feet. Can you kind of give us the timing and the amounts?

Gary L. Whitlock

Lasan, we’re going to expand – we’ll spend about $125 million of the $300 million or so this year. And then the remainder of those expenditures will be spent in ‘010 and the first half of ‘011.

Lasan Johong - RBC Capital Markets

Great. Thank you very much.

Operator

Our next question will come from the line of Faisel Khan with Citigroup.

Faisel Khan – Citigroup

Just trying to figure out how the acceleration and the DOE grants kind of benefit the shareholders in terms of your CAP Ex planning for smart grading and the transmission lines?

David M. McClanahan

Well, first we only earn on our net investment here. And because of this funding by the federal government of $150 million we’re going to have less invested in this program. But our customers are going to get the benefit of that. Because they’re going to have to pay $150 million less. We think that’s a win-win situation. What’s good for our customers in the long term is going to be good for us. And this is enabling technology. It will enable our customers to do things with home area networks and smart appliances and time of day rates that they can’t do today. I think that along the way we’re going to have some opportunities arise because of that.

The other piece of this is we get to start investing now in the mid-grid and putting sensors and automated pull top switches and other things on the grid that’s going to make the grid more reliable. It’s going to make us more efficient. We’re going to be able to heal the grid quicker following outages. We’ll be more preventative rather than reactive in our maintenance. So I think it’s going to make us a more efficient utility. In the long run that’s going to bode well for us.

Faisel Khan - Citigroup

In theory over the next five years your net rate base should go up with these investments, is that a fair statement?

David M. McClanahan

That’s correct.

Faisel Khan - Citigroup

Okay. And just off question. You’re operating cash flows for the nine months to date were $1.4 billion dollars. And then you also talked about the bonds that you would issue from storm recovery. By the end of the year with all this cash coming in the door, including the equity offering you had early in the second quarter, what are you looking at your debt to CAP to be by the end of the year?

Gary L. Whitlock

Debt to CAP will be about 73%. We will pay down debt, Faisel this year of a little more than a billion dollars. We’ll end the year with between $600-$700 million on our balance sheet.

Faisel Khan - Citigroup

Of cash?

Gary L. Whitlock

Of cash.

Faisel Khan - Citigroup

Okay. Great, thanks. I’ll get back in line.

Operator

Our next question will come from the line of Scott Engstrom with Bynum Capital Management.

Scott Engstrom - Bynum Capital Management

Gary, just want to follow up on your comments on the guidance. You have pointed a number of exceptions. What I was trying to understand is, are those exceptions are you talking about those specifically as it relates to the fourth quarter? Or are you saying going back and adjusting the numbers so far through nine months for some of the things you pointed out?

Gary L. Whitlock

It would be going back for nine months. And we’ve been consistent on these. And let me just give you third quarter and then year to date, Scott, should help you. If you look at the third quarter, we reported $0.31 per share. And if you adjust for the mark-to-market in inventory the Time Warner shares and the SESH write off which was an accounting change, the application of an accounting standard, you’re still back to $0.31 a share. If you look at that for the nine months, and I’ll just give you the numbers, we reported $0.74. There’s a $0.05 adjustment for mark-to-market in inventory. As you know those are temporal they’ll return to us. The Time Warner ZENS $0.03 and then $0.03 the other way for the SESH write off, biting that back. So you get the $0.80. So, on our guidance for this year we really don’t exclude that much, frankly, from our guidance. And what we’re trying to show you is that we’re at $0.80 for nine months. I think if you look at the tax rate, earlier in the year I started at a higher tax rate, we guided you to 35%. This quarter is a 25% tax rate because we actually settled those 2004, 2005 audits with the IRS. So it’s for the full you’ll come back to 34%. In fact our year-to-date tax rate’s 33%. I want to remind you and others as you look forward 2010, though, our tax rates should return to more of a normalized rate of 37%-38%. And we’ll give you some guidance on that early next year.

Scott Engstrom - Bynum Capital Management

Okay, great. That was very helpful. Thanks a lot.

Operator

Our next question will come from the line of Steve Gambuzza with Longbow Capital.

Steven Gambuzza - Longbow Capital

Good afternoon. I was wondering if you could just – the question about cash flow, $1.4 billion to the first nine months of the year. What would you expect cash flow from operations for the full year to be?

Gary L. Whitlock

Well, first of all, I think the number you’re picking up probably includes a securitization bonds. But if you look for our nine months we will have our debt level at the end of this quarter is $7 billion 045, the fourth, we will not increase debt in the fourth quarter. So we will end the year with about $7 billion of debt, $7,045 million, that sort of range. And between $600-$700 million of cash on the balance sheet. So for this year, in terms of operational cash flow – and again this has two elements I want to bring to your attention. One, we’ve done I think an excellent job managing working capital, putting new asset management agreements in place that really allow us to more effectively manage our working capital of the long term. Plus we’ve had these benefits that I mentioned of the differed – continue some differed tax benefits, accelerated depreciation bonus depreciate. So for this year, Steve, we will fund fully our CapEx program, our dividend. And we’ll again, as I said end the year with $600-$700 million of cash on the balance sheet.

Now of course that includes the terms of financing that we need at SESH that we were the beneficiary of. We had been funding that ourselves. And we had $186 million, really a total of $215 coming back on that. And of course we’ve had $485 million of equity issuance this year as well.

So I think what you see is an improved balance sheet, which was our commitment as we started this year. We’ve improved our balance sheet and put ourselves in, I think, a strong position as we look to execute our business plan in 2010 and beyond.

Steven Gambuzza - Longbow Capital

And clearly the free cash flow has been fantastic. Looking at the cash flow statement I can’t back out the securitization impact, quickly. But the SESH cash flow looks like that came back on the investing section of the cash flow statement.

Gary L. Whitlock

It did. And there are a three elements of that, that was the financing that we did at SESH and then there was a payment that we received from Sonas, it flowed back to us as well.

Steven Gambuzza - Longbow Capital

I guess really my question is as we look to the fourth quarter given you net income guidance there’s been very substantial cash flow benefits other than net income and depreciation for the first nine months of the year. You’ve pulled working capital out. You’ve had substantial deferred tax benefits. As we look to the fourth quarter of this year and think about fourth quarter cash flow, will there be other components to cash flow besides net income and depreciation of consequence, i.e. more differed taxes and more working capital reductions?

Gary L. Whitlock

Not material in the fourth quarter.

Steven Gambuzza - Longbow Capital

Okay. And then you also mentioned that you signed some new contract in the Haynesville or some of the shale place in your opening remarks. I was wondering if you could please elaborate on those?

David M. McClanahan

Well, those are really the two that I mentioned, Shale and EnCana.

Steven Gambuzza - Longbow Capital

Okay.

David M. McClanahan

And these are terrific contracts at least in our mind, we’ll spend on the first phase up to $325 million to gather and treat up to 700 million a day. And then both parties have an option to increase their volumes in increments of 200 million a day, up to a total of a billion a day. They have to just give us notice to do that. And it takes about a year to make these kind of – you have to acquire the equipment and write-aways and so forth. But we’re excited about them. We think it’s a great – Haynesville is probably one of the most prolific gas place discovered in the US in many, many years if not ever. And to be in there in a really good spot, we’re excited about.

Steven Gambuzza - Longbow Capital

When you look forward to 2010, given the dynamics of kind of growth in the Shale place and potentially continuing declines off of some of the traditional areas, do you feel like volumes have to be positive to flat versus what they were this year for your field services business?

David M. McClanahan

Well, if you look at what happens so far this year we’re kind of flat on a year to date basis. There is no question we’re experiencing volume losses in our traditional basins. There hadn’t been very much drilling at all in those basins. As a result of that you’re seeing volumes start to decline. We are offsetting those volumes with these new shale place, both in the Fayetteville, Woodford and the Haynesville. And I expect that that will more than offset the declines that we’re experiencing in our traditional basin. We also hope that if gas prices firm up a little bit that we’ll see a resumption of some level of activity in our traditional basins. And if we do I think we have – we’re very well positioned then with both the shale place and these traditional basins because we have very good facilities there. We not only gather the gas, we process a lot of it. So we’re very well positioned, I think, once drilling picks back up.

Steven Gambuzza - Longbow Capital

All right. Thanks very much.

Operator

Our next question will come from the line of Mark Rogers with Gagnon Security.

Mark Rogers - Gagnon Security

Thank you. I was just wondering, when you first started discussing smart grid initiatives you had to come up with both internally and with the Texas PUC and agreed upon rate increase to cover the capital investment, correct?

David M. McClanahan

Correct.

Mark Rogers - Gagnon Security

Okay. So now with $150 million less being spent; are you revising that rate increase?

Gary L. Whitlock

What will happen is one of two things. One is that the tariff just won’t go as long. We obviously don’t have to recover $150 million less. And that’s what we prefer to happen because we’re going to be funding a fairly large amount of capital over the next two or three years. The other thing is they could reduce – the PC could reduce the tariff to reflect this reduction in capital. And we’ll be going in, I think, next year for a reconciliation. And I’m sure that will be discussed at that time.

Mark Rogers - Gagnon Security

Okay. And I’m not trying to be negative on this, I’m just wondering for the foreseeable future, probably at least a year until this reconciliation the customer is actually not going to be seeing any saving with the $150 million support from the DOE. It would have to be until the rate basis is readjusted?

David M. McClanahan

Yeah. The tariff is not going to change, Mark. But the value of the smart grid of the advanced metering is, what they could do with their energy consumption, how they can manage their home. You’re going to have communications where they’re going to be able to see essentially on a real-time basis how much energy they’re using. You’re going to be able to communicate with smart appliances. You’re going to be able to have home area networks that are focused around energy. So there’s going to be different ways for them to get value out of this. But you’re right. Our plan is not to go in and change the tariff immediately. But I think the value of this is enabling technology and its how you use it.

Mark Rogers - Gagnon Security

Absolutely. And then one quick follow up. The meters on the smart grid really are one of the easier things to implement. You just turn on the meters. But the back hall systems need to be there. With this two year accelerated deployment schedule in 2014 to 2012, are the rest of your processes going to be able to be ramped up faster? Such as the dynamic pricing models, the substations all the two way communication modules necessary, the networking capability or are the meters going to be ready with everything else to follow?

David M. McClanahan

We’ll have to accelerate the implementation of our communications infrastructure. I think you’ve hit on a very important part. You have to have the communications network there in advance of when the meter gets there so you can communicate with it. But we have a plan that we’ve put together that in fact will do that. We’ll probably begin that this year, in fact, so we can be ready as these new meters get here and we can start, basically, doubling our installation rate monthly. But we believe we have a good plan put together and we can handle it, yes.

Mark Rogers - Gagnon Security

Okay. Just one follow up. You’re using Itron for your meters, that’s publicly disclosed. Are you using them for the communication modules as well?

David M. McClanahan

No.

Mark Rogers - Gagnon Security

Oh, you’re not.

David M. McClanahan

No.

Mark Rogers - Gagnon Security

Okay. So this doubling of deployment schedule; is this something that we can see starting? Because you still have to get the checks. I’ve been looking at some of these delays, they say maybe even three months. This is a Q1-Q2 story on doubling the deployment schedule?

David M. McClanahan

I think that’s right. You have to negotiate these agreements. And we’ll start that the middle of next month. We expect by the first quarter, early the second quarter we will start this ramp-up. But we are very confident we’ll get it. So we’re going to start planning on that, and anticipating it from a communication standpoint.

Mark Rogers - Gagnon Security

Great. Congratulations.

Operator

Our next question is a follow-up question from Lasan Johong with RBC Capital Markets.

Lasan Johong - RBC Capital Markets

(Inaudible) cash balance is $670 million by year end. That’s a pretty large chunk of cash to have on your balance sheet. Do you have any preliminary plans on what you want to do with it?

Gary L. Whitlock

Look, we’re going to fund operations in capital going forward. I think the decisions on that, and we’ll give you more a view of that when we release fourth quarter earnings. We really need to look at our CapEx program next year. Both franchises require capital and as David mentioned and I mentioned as well, we have a number of projects we’re continued to look at, both in pipelines and field services. So we really want to see our CapEx program. But I think the real take away, Lasan, is that we’ve been executing our business plan, which is improving this balance sheet and equity capital has been very helpful to our company. And of course, recovering the Hurricane Ike costs through the sale of these bonds. And that’s the real key to having the cash. We extended that cash, now we’re getting it back plus a return. So we’re going to be very thoughtful about it. And we need to really look at our CapEx program as that unfolds with more (inaudible) in the next 60 days or so.

Lasan Johong - RBC Capital Markets

Specifically I was wondering if you thought of any potential shareholder initiatives, like, share repurchase program or something like that?

Gary L. Whitlock

No, not really. Look, I think where we are, we still look at our leverage. We’ve made good progress. We’ve paid down debt. We’re undrawn at our credit facilities. But over the long term for us to execute our – Lasan, to execute our business plan we want to continue to improve the balance sheet, obviously. And I don’t think that would be in our best interest of our shareholders at this point. I think we’re going to continue to focus looking at our dividends. The board will take a very thoughtful look at that early in the new year. And I think we’ve been paying our dividend so far in a very thoughtful way. We’re going to continue to look at that. So I think that’s – our shareholders should be rewarded through the dividend and in our ability to invest our capital and grow this company over the long term.

Lasan Johong - RBC Capital Markets

Understood. Thank you.

Operator

Our next question will come from the line of Steven Wong with Carlson Capital.

Steven Wong - Carlson Capital

Hi, good morning guys. Just had a follow up on the field service business. I know you guys had, like, $100-$135 million, I think for next year on top of the Shale EnCana deal. How does that look today based off what you talked to the producers and how should we think about that for next year? And then (inaudible)

David M. McClanahan

Well, we have the Shale EnCana schedule. And so we feel pretty confident in that. So we’ll be spending after the $125 million this year in ’09, $175 million on those products the next year, year and a half. But we have some other significant projects that we’re going to continue. We had a capital budget this year of $277 million in field services. We’re going to probably spend about $185 million or so, maybe $200 of that budget. The rest of its going to be carried over into ‘010. And then we have the Shale EnCana on top of that. So we’re going to have a sizable capital budget in field services next year. At least we hope we are because these are very attractive projects that have good – and they’re good contracts and we look forward to getting the facilities in the ground.

Steven Wong - Carlson Capital

But, David, I thought that next year’s CapEx for field service before the rollover was already $100-$125 million, excluding Shale EnCana.

David M. McClanahan

Let me just look and see if I can refresh my memory on our CapEx for –

Steven Wong - Carlson Capital

I guess, just how should I think about CapEx for field services all in for next year?

David M. McClanahan

Let’s see here. Last year we said that field services capital budget was going to be $142 million. We will spend that plus probably $130 million more on the Shale EnCana. Plus we’ll have some carry over from this year of $79 or $80 million on top of that. Now, we’ll have to look at some of our assumptions. We may bring that $142 down a little bit. But we’re going to have – this year we had $277 million capital budget. We’re not going to probably have quite that big a budget. We’re going to have pretty close to that budget next year I would expect if not – it’s going to be right around that $250-$300 million level.

Steven Wong - Carlson Capital

Okay. Yeah, I just want to make sure that that $70-$80 million carry over wasn’t coming down to $142.

David M. McClanahan

The $142, of course, that’s a year old now. And that had some green field projects that we assumed. So there’ll be some averaging out there. But we’re going to spend $142 plus without the Shale EnCana.

Steven Wong - Carlson Capital

Okay. And how should we kind of think of milestones for the incremental 1B on the Shale EnCana? Like you said it takes one year out. I mean, next year is there even a possibility that they could come on – indicated next year or is this more of 2011 event?

David M. McClanahan

I would say it’s 2011. They have to give us notice so we can order the equipment and the install it. I will say that once we get notice, I’m sure that we’ll tell the market about it. So we’ll let you know if we’re going to expand these. But I think both Shale and EnCana, it’s going to be based on the success of their drilling program. And as they get more experience there I think they’ll decide what they want to do.

Steven Wong - Carlson Capital

And then just a last one here. I’m following up with kind of your comments here on the pipelines side of the business. Based off your (inaudible) with all the hyperlific (ph) the Shale play has been, should we anticipate any expansion of SESH coming up especially with a PL losing their approval on their pipeline of Florida or even the – I think you guys are also looking to do additional Haynesville pipe. How should we think about what’s going on there?

David M. McClanahan

We continue to talk with Shippers on SESH. And when the timing is right there we’ll expand that. And we’re continuing to talk to the folks that are shipping on it now as well as others. So I don’t think that’s imminent. But I think we’re clearly in talks with folks about it. We still are looking at the Haynesville area and whether or not additional pipe is needed there and talking to producers and others about that. But in order to do a pipe like that we’d have to have substantial commitments by producers to do that. But those conversations go on every week. So we are continued actively looking at new projects in that area.

Steven Wong - Carlson Capital

But the SESH contracts this summer, I think you had some short term contracts. Have there been any new longer term contracts lined up for SESH?

David M. McClanahan

I don’t think so. We had about 205 million a day that we could sell this year. Part of that was the shippers firm commitments didn’t start till next year and then ‘011. There’s about 85 million that really isn’t sold. I think they sold through the middle of the fall all have been about 65 million of that. But to my knowledge there are no new long term contracts. All these are short term firm contracts are just interruptible contracts.

Steven Wong - Carlson Capital

Okay. Thank you.

Marianne Paulsen

Okay, Tina. We’ll take one more question.

Operator

Thank you. Your final question will come from the line of Fisel Khan with Citigroup.

Fisel Khan - Citigroup

Just a couple more questions. Gary, if you could elaborate a little bit more on the tax rate for the quarter. I think you talked about it but I may have missed your commentary on it. It’s a little bit lower than we expected.

Gary L. Whitlock

Yeah. I’d be glad to. First of all, think about the full year first and let me come back to that. Full year tax rate now we’re guiding at 34%. Our year-to-date tax rate now is 33%. In the third quarter, thought, we actually completed or finalized our 2004, 2005 audits with the Internal Revenue Service. As such we – and had some other minor adjustments. But that was the bulk of it. We had about a $16 million favorable entry to taxes. So our tax rate in the third quarter is 25%.

Fisel Khan - Citigroup

Gotcha. Okay. Understood.

Gary L. Whitlock

Is that helpful?

Fisel Khan - Citigroup

Yeah, it is. Thank you. And then last question. Given your strong balance sheet position going into next year, is it fair to say that you are properly capitalized for most of our projects along with the potential expansion of the gathering and processing system for Shale EnCana? I know you have the 700 million cubic feet a day expansion but there’s also the incremental (inaudible) above and beyond that. Does the equity raised in the balance sheet position you’ll be in at the end of the year fully fund that development of that expansion also?

Gary L. Whitlock

I think the way – that’s a good question. It’s a fair question. We’ve raised as we mentioned $485 million of equity capital. At this point we still have turned on our drip program and our savings plan as well which generates around $75 million or so of equity capital. So I think at this point we feel good about our position to execute our business plan. I will say this though, it’s dependant on, Fisel, our capital plan for next year. So to the extend we have more capital in field services there’s significantly more capital. We’ll have to always make sure we have the correct mix of debt and equity. So it really depends on that go forward to capital. And by the way, I’d be excited if David said if we can execute some really great contracts similar to the Shale EnCana. That would be a great thing for our shareholders.

Fisel Khan - Citigroup

Thanks for that. Thanks a lot. I appreciate the time guys.

Marianne Paulsen

All right. Thank you very much to everyone. I would like to thank you for participating on our call today. We appreciate your support very much. Have a great day.

Operator

Ladies and gentlemen, this concludes CenterPoint Energy’s third quarter 2009 earnings conference call. Thank you for your participation.

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